Author Topic: Battered Tech(ish) stocks  (Read 2154 times)

GilesMM

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Battered Tech(ish) stocks
« on: November 05, 2022, 05:53:59 AM »
Could be a buying opportunity for some name brand stocks which have swooned this year post-pandemic. 

Carvana down 96%
Peloton 95%
Meta 73%
Netflix 62%
Carmax 60%
Amazon 50%

Or if you think the recession is just getting started, could be a short opportunity.

Thoughts?

achvfi

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Re: Battered Tech(ish) stocks
« Reply #1 on: November 05, 2022, 11:16:52 AM »
Its an opportunity to think through your asset allocation and diversify portfolio beyond just growth stocks.

maizefolk

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Re: Battered Tech(ish) stocks
« Reply #2 on: November 05, 2022, 11:30:15 AM »
Yes, I agree it is probably a good opportunity to buy these stocks. Or short them.

Knowing which of the two opportunities is the tricky bit though.

MustacheAndaHalf

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Re: Battered Tech(ish) stocks
« Reply #3 on: November 05, 2022, 07:27:25 PM »
Could be a buying opportunity for some name brand stocks which have swooned this year post-pandemic. 

Carvana down 96%
Peloton 95%
Meta 73%
Netflix 62%
Carmax 60%
Amazon 50%

Or if you think the recession is just getting started, could be a short opportunity.

Thoughts?
I suspect we won't get another Covid-19 pandemic any year soon, so for companies that benefited from that unique condition, I'd take their Dec 31 2019 price instead.  By that measure, Amazon (-1.5%) and Netflix (-19%) aren't down that much.

PTON ended 2019 at $28.40 and is $9.39 now, or about -67% from it's pre-pandemic level.  A recovery wouldn't be 20x, but 3x.  But when I see their 4.0x debt/equity, I think their odds of going under are higher than other stocks, so I'd pass.

META ended 2019 at $205.25 versus $90.79 now, offering about 2.3x in a recovery.  I view 0.21 debt/equity as suggesting it will survive current conditions to recover.  I currently own it, but if I find something better I'll switch.

MustacheAndaHalf

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Re: Battered Tech(ish) stocks
« Reply #4 on: November 05, 2022, 07:39:37 PM »
Yes, I agree it is probably a good opportunity to buy these stocks. Or short them.

Knowing which of the two opportunities is the tricky bit though.
For how long?  You're saying it's tricky right now, and maybe that's true through 2023.  If you extend that over the next 5 years, would you short stocks or buy them?

maizefolk

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Re: Battered Tech(ish) stocks
« Reply #5 on: November 05, 2022, 08:06:08 PM »
Yes, I agree it is probably a good opportunity to buy these stocks. Or short them.

Knowing which of the two opportunities is the tricky bit though.
For how long?  You're saying it's tricky right now, and maybe that's true through 2023.  If you extend that over the next 5 years, would you short stocks or buy them?

Stocks as a whole five years out? I'm definitely a buyer. These particular stocks, even five years out it is hard to say.

Peloton -- I think the most likely outcome is Peloton doesn't exist in five years, or has been bought up by someone else at fire sale prices. Might recover. Might not.

Meta -- Based on the financials this should be an easy one. Facebook makes plenty of money and while that may change as its primarily older user base starts dying off, it shouldn't happen in the next five years. The issue is that Zuckerberg really could keep spending all that cash flow and more on his hobby projects and no one can stop him because he has 54% of the votes.

Netflix -- The risk here is industry fragmentation/consolidation. The world doesn't need and cannot support eight streaming services all producing original content. Netflix has benefited a lot from a first mover advantage but in the long term it doesn't have the deep back catalog of media owned by a parent company to monetize of Disney+, Peacock, Hulu, HBOMax, or Paramount plus, and it's a comparatively small company that has to make a direct profit from subscriptions to cover the cost of producing or licensing content rather than being a prestige product to help build customer loyalty to a bigger company like Amazon Prime (9x the market cap of Netflix) or AppleTV (20x the market cap of Netflix).

Amazon -- Will definitely still be around. But at what valuation? Amazon's 100+ P/E ratio made sense in a low interest rate/low discount rate environment. If interest rates stay high, the net present value of Amazon's future earnings and future earnings growth will be a lot lower.

ChpBstrd

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Re: Battered Tech(ish) stocks
« Reply #6 on: November 05, 2022, 09:10:08 PM »
I see two types of companies here:

1) Healthy growth companies like AMZN, PTON, TDOC, CHWY, DOCU, MTCH, RBLX, and CRM sport triple-digit or negative PE ratios, which will be hard to justify when (a) recession fears start knocking down their future growth estimates, and (b) higher interest rates beckon people away from what used to be called the TINA trade. Well, now there is an alternative to buying companies that had a hard time justifying their valuations in good economic times. Treasuries might be heading to 6-7%, rates that will double an investor's money in 10-12 years with no risk of technological disruption, antitrust actions, changing business conditions, or product obsolescence.

2) Former tech stock darlings that have hit a rough patch like META, NFLX, or KMX now trade with the value stocks. However, they each have severe product marketing or competition problems, and maybe don't have as bright a future as their value stock peers these days. Compare any of these companies to beaten-down value stocks like CE, DOW, MS, XOM, or VZ on valuation or earnings durability. Is it worth betting that Netflix won't suffer market share losses to another 2-3 major competitors in the next few years, Meta's metaverse will become the next big thing, or the moat around a middleman website for cars will never be challenged? Why not bet on more plastic being used, investment banks bringing in more money, or Verizon's 7% dividend?

Between these two types you have companies like Apple (PE: 22.65), Alphabet (PE: 17.28), and MSFT (PE: 23) which are expected to grow faster than the overall economy, and have stable earnings, but not unleash any major breakthroughs. These are solid bets, but vulnerable to becoming the next IBM, GE, or even AOL.

I'd be more inclined to go with value stocks (through an ETF like VBR, VOE, or VTV) because they will be less affected by inflation / rising discount rates than their growth peers which are priced on the assumption of distant future earnings. And if inflation doesn't turn out to be a problem, value stocks are so much cheaper than growth that it probably won't be regretted.

S&P500 growth stocks forward PE:  20.2 (earnings yield: 4.95%)
S&P500 value stocks forward PE:    14.4 (earnings yield: 6.94%)
https://www.yardeni.com/pub/stockmktperatio.pdf

As Steve Case says, in 5 years there won't be a "tech sector" because it'll be the assumption underlying every business. I think at this point in the evolution of the transistor we're almost as likely to find technical breakthroughs and world-changing products in any other industry. Smartphones, laptops, ad-supported sites/apps, networking systems, e-commerce, and a lot of software categories are mature markets and commodities in late 2022, with cutthroat competition and slimming margins.
https://www.marketwatch.com/video/marketwatch-25-years/steve-case-says-in-five-years-there-wont-even-be-a-tech-sector/CB548883-B1E0-4D07-A4A4-C5B37BF7D7FC.html

MustacheAndaHalf

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Re: Battered Tech(ish) stocks
« Reply #7 on: November 05, 2022, 11:01:28 PM »
Treasuries might be heading to 6-7%, rates that will double an investor's money in 10-12 years with no risk of technological disruption, antitrust actions, changing business conditions, or product obsolescence.
If you had to bet that 30 year treasuries will pay a 7% yield within a couple years... what odds would you assign to that possiblity?  How rare is it?

10 year treasuries yield 4.16%, or a total +50% return
stock market averages 10%/year, or +160% return
META recovers (3yr?), switch to VTI (7yr @ 10%/yr) = +290% return


... beaten-down value stocks like CE, DOW, MS, XOM, or VZ ...
Exxon Mobil (XOM) is up +88% YTD.


I'd be more inclined to go with value stocks (through an ETF like VBR, VOE, or VTV) because they will be less affected by inflation / rising discount rates than their growth peers ...
Active money managers are taking that route, and seem to like health care and energy stocks.  The problem comes in a recovery, and those value stocks won't recover much.

I'd encourage you to avoid Vanguard Small Cap Value ETF (VBR), which I held for years before realizing it was crappy at both small cap and value.  Click "weight" to get the 9-box, where you'll see the lower left small/value corner.

VBR is 57% small and 42% value, with a small/value box of 26%
https://www.morningstar.com/etfs/arcx/vbr/portfolio

SLYV is 100% small cap and 48% value, so its small/value is 48%
https://www.morningstar.com/etfs/arcx/slyv/portfolio

Back in March I held AVUV briefly before I switched to bearish investing.  It holds 94% small cap, 55% value, for a small/value box of 53%.
https://www.morningstar.com/etfs/arcx/avuv/portfolio

vand

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Re: Battered Tech(ish) stocks
« Reply #8 on: November 06, 2022, 03:39:07 AM »
The only company I really like that has been mentioned is perhaps ironically the one with the highest valuation -  AMZN.

Amazon services are not just a cornerstone of the modern internet, but of modern business and indeed US Government as a whole. It's DEFIINTELY going to be around, and what's more there is vested interest in maintaining its dominant position for consumers, business & Government.

I wouldn't take their high P/E has a particular turn off - AMZN is well known for reinvesting most of its income back into growing the business and producing increasing efficiencies. AMZN price/sales is just 1.8 vs 8 for Microsoft. I'm pretty sure that if AMZN wanted to pivot their business and realise all their good will today they could easily raise their margins significantly and suffer very small loss of business -- but then they would become just another good but run-of-the-mill business.

Some of the companies mentioned are probably value destroying entities and I wouldn't touch with a long bargepole.

NorCal

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Re: Battered Tech(ish) stocks
« Reply #9 on: November 06, 2022, 08:31:30 AM »
While I don't have high confidence in my ability to predict such things, I think that group is a combination of great long term value and value traps.  This is based on my knowledge of headlines, and not really a deep dive in the financials.

-I think investors will pressure Amazon to sell off AWS.  AWS deserves to be valued like a tech stock, although it seems competition is rising there and their services are closer to a commodity than investors would like to admit.  I question whether the remainder of Amazon deserves to trade at multiples similar to high-margin tech stocks.

-Netflix is interesting, but their growth has petered out and they have real competition.  This comes down to a valuation question.  I wouldn't say they deserve a massive premium over other media stocks.

-I view Meta as a value-trap.  Or maybe there's just part of me that wants to see the shitshow of social media spectacularly blow up for all the damage they've done to society.  I struggle to see a scenario where Meta regains the social relevance they used to have.  There is a price at which the stock makes sense, but we won't know what that is until their earnings stabilize and they make inevitable drastic cuts to the metaverse nonsense.

-Peloton still has a market cap around $3B, while losing $1.2B in the last quarter.  Revenue dropped nearly 50% between Q4 2021 and Q2 2022, and they now have negative gross margins.  They only have $1.2B of cash left and are already stretching out payables.  I don't make stock predictions often, but I feel confident you could short this one all the way to zero. 

-I haven't followed Carmax or Carvana, but I think there are good reasons to not be in that business now.  And I see Carvana dropped ~40% in the last day alone.  There might be opportunities here, but there's massive risk on either side of those bets. 
« Last Edit: November 06, 2022, 10:08:57 AM by NorCal »

ChpBstrd

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Re: Battered Tech(ish) stocks
« Reply #10 on: November 07, 2022, 09:13:10 AM »
Treasuries might be heading to 6-7%, rates that will double an investor's money in 10-12 years with no risk of technological disruption, antitrust actions, changing business conditions, or product obsolescence.
If you had to bet that 30 year treasuries will pay a 7% yield within a couple years... what odds would you assign to that possiblity?  How rare is it?

10 year treasuries yield 4.16%, or a total +50% return
stock market averages 10%/year, or +160% return
META recovers (3yr?), switch to VTI (7yr @ 10%/yr) = +290% return
I think the scenario where treasury rates rise to 6-7% cannot happen at the same time as tech stocks with three-figure or negative PE ratios rebound to their 2021 highs. Even valuations based on the most optimistic far-future earnings estimates get chopped down by a higher discount rate. Plus, as long as Jerome Powell is Federal Reserve Chairperson, there will be a significant lag in monetary policy, because he does not trust forecasting. Recent comments from the Fed suggest the plan is to keep rates higher for longer than strictly necessary, to ensure inflation is killed and to prevent policy whiplash like we saw in the 1970s and early 1980s. Thus, dramatically lower interest rates may not come to the immediate rescue of tech stocks like they did in the 1990, 2001, and 2008 recessions. There's a very good chance, IMO, that we saw the lowest interest rates of our lifetimes in 2020-2001 and the era of a 0.25% Federal Funds Rate will never return.

If I had to assign odds, I'd say the FFR has a 75% chance of exceeding 6% sometime next year, and 10-year treasuries have 60% odds of exceeding 6% sometime next year. The odds are higher for the overnight rate because I expect a 0.5% to 0.75% yield curve inversion between the overnight and 10y rates at the time the FFR peaks. My expectations are based on the data and reasoning on the inflation and interest rates data and models thread. The odds of those things not happening are basically the odds of a financial crisis / severe recession hitting within the next 6 months and ending the inflation problem the hard way.

I don't understand the meaning of the last 3 lines above, about treasuries, VTI, and Meta. I think the gist is that the expected policy lag could allow one an opportunity to profitably hold bonds through the post-recession rate cuts, and then switch to stocks after the rate cuts are finished in 2024-2025ish and we've had a 4-10 quarter recession. If that's the meaning, then I agree this is shaping up to be an attractive play.

Quote
I'd be more inclined to go with value stocks (through an ETF like VBR, VOE, or VTV) because they will be less affected by inflation / rising discount rates than their growth peers ...
Active money managers are taking that route, and seem to like health care and energy stocks.  The problem comes in a recovery, and those value stocks won't recover much.
What if there is no tech recovery for the next few years?

Let's consider a possible future where the 10y treasury stays around 4+% for the next few years and a middle class shell-shocked by a severe recession changes their buying habits, shifting away from expensive consumer discretionary gadgets or half the fluff for sale on Amazon. Suppose they have no more hours in their days to contribute to attention-economy advertising stocks like Meta, Snap, and Alphabet. Let's consider a world where the average consumer's monetary budget for tech and attention budget for apps stops growing after decades of increases. Or imagine a world where the WFH economy actually requires less corporate IT spending than the old era of onsite server farms, office building access and security systems, and the practice of running ethernet cable through the ceilings and down to beige cubicles.

If all that seems too specific, just imagine a world where the Personal Savings Rate goes from 3.1% where it is today back up to 7% like in the 20teens or early 1990's, or if it goes to the 10-14% range like we saw in the inflationary 1960's through early 1980's. That would shrink the market for smart refrigerators, video games, and Apple ear buds, because arguably a lot of that long-term decline in the PSR went into increasing consumer spending on the "tech" which dominates the S&P500.

Such a future is consistent with Stein's Law, but it would also imply that there might not be a booming recovery for growth/tech stocks as occurred after 1991, 2003, and 2008. And the above describes the recovery scenario... a future in which stagflation takes hold would be worse for growth stocks. What if companies which had high PE ratios in the past due to being "tech" will in the future be priced in line with other companies in the consumer discretionary, financial, and communication sectors?

Thanks for the insights about VBR. Think I'll replace it on my watchlist with AVUV or SLYV. I guess there's more demand for SCV funds than the liquidity of the SCV market can handle and so they can only tilt in that direction?

MustacheAndaHalf

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Re: Battered Tech(ish) stocks
« Reply #11 on: November 08, 2022, 04:04:21 AM »
If I had to assign odds, I'd say the FFR has a 75% chance of exceeding 6% sometime next year, and 10-year treasuries have 60% odds of exceeding 6% sometime next year.
If you offered an even money bet (50/50), I'd bet against 10-year treasuries paying over 6% sometime in 2023.

I don't understand the meaning of the last 3 lines above, about treasuries, VTI, and Meta.
I was comparing your idea of treasuries to other choices.  Even if you update that with 6% yields, the stock market's 10%/year historical return leaves it behind.

What if there is no tech recovery for the next few years?
Once Meta recovers, it doubles.  The market takes 7.3 years to do that at 10%/year.  So it's not just a few years - Meta can recover in 1,2,3,4,5,6 or 7 years and beat the market.

maizefolk

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Re: Battered Tech(ish) stocks
« Reply #12 on: November 08, 2022, 07:54:12 AM »
Once Meta recovers, it doubles.  The market takes 7.3 years to do that at 10%/year.  So it's not just a few years - Meta can recover in 1,2,3,4,5,6 or 7 years and beat the market.

It took amazon roughly a decade to recover after the tech crisis.

22 years later Cisco still hasn't broken the price ceiling it set in 2000 despite total net income that is 5x as high today as it was at the turn of the century (10.6B in 2021, ~$2B in 1999).

GilesMM

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Re: Battered Tech(ish) stocks
« Reply #13 on: November 08, 2022, 10:49:13 AM »

...

22 years later Cisco still hasn't broken the price ceiling it set in 2000 despite total net income that is 5x as high today as it was at the turn of the century (10.6B in 2021, ~$2B in 1999).

1999 was the initial internet tech bubble. Lots of stocks were over-valued based on wild speculation as to their future potential, including Cisco.  A return to those highs requires not just income, but wild speculation about future income.

maizefolk

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Re: Battered Tech(ish) stocks
« Reply #14 on: November 08, 2022, 01:52:36 PM »
Do we know the same is not true today though? Amazon is a great business. But I don’t think that means we can necessarily assume that it’s year ago valuation—in a super low discount rate environment— was a fair one that it is likely to snap back to in the next several years.

NorCal

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Re: Battered Tech(ish) stocks
« Reply #15 on: November 08, 2022, 02:26:23 PM »

...

22 years later Cisco still hasn't broken the price ceiling it set in 2000 despite total net income that is 5x as high today as it was at the turn of the century (10.6B in 2021, ~$2B in 1999).

1999 was the initial internet tech bubble. Lots of stocks were over-valued based on wild speculation as to their future potential, including Cisco.  A return to those highs requires not just income, but wild speculation about future income.

I think the same can be said about the current crop of tech companies under discussion.  There are some difference in degree and detail, but it's a very similar story.

Fundamentally, Meta sells online advertising based on viewers on their sites.  Why should an investor believe that Meta has better revenue growth prospects than companies like Yahoo IAC, or similar?  Believing Meta will "recover" implies they're return to historical growth rates.  Meta had revenues of $56B in 2018 and $118B in 2021.  A "recovery" generally implies they can double revenue again sometime around 2025.  Consider me skeptical.

Netflix is similar.  Why should they be valued differently than say Disney, Amazon, HBO, etc?  While the valuation question is a little muddied because the rest are part of larger conglomerates, it's still the same fundamental question.  The media business is highly competitive and Netflix is simply at a scale that they can't continue growing similar to their historical trends. 

It's not to say they may not be good investments.  I'm just saying you have to take a real close look at the actual earnings and growth potential of each company while looking at their competitors.  Using prior stock prices is not a good benchmark.  This is a lot of work, which is why I don't really do it anymore.

SilentC

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Re: Battered Tech(ish) stocks
« Reply #16 on: November 08, 2022, 02:30:25 PM »
If I had to assign odds, I'd say the FFR has a 75% chance of exceeding 6% sometime next year, and 10-year treasuries have 60% odds of exceeding 6% sometime next year.
If you offered an even money bet (50/50), I'd bet against 10-year treasuries paying over 6% sometime in 2023.

I don't understand the meaning of the last 3 lines above, about treasuries, VTI, and Meta.
I was comparing your idea of treasuries to other choices.  Even if you update that with 6% yields, the stock market's 10%/year historical return leaves it behind.

What if there is no tech recovery for the next few years?
Once Meta recovers, it doubles.  The market takes 7.3 years to do that at 10%/year.  So it's not just a few years - Meta can recover in 1,2,3,4,5,6 or 7 years and beat the market.

IF Meta recovers and IF stocks deliver 10% a year.  There is risk reward, diversification to consider if you are not investing on a 50 year horizon.  Most people want to FI before they die. 
« Last Edit: November 08, 2022, 04:36:04 PM by SilentC »

ChpBstrd

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Re: Battered Tech(ish) stocks
« Reply #17 on: November 08, 2022, 03:09:39 PM »
What if there is no tech recovery for the next few years?
Once Meta recovers, it doubles.  The market takes 7.3 years to do that at 10%/year.  So it's not just a few years - Meta can recover in 1,2,3,4,5,6 or 7 years and beat the market.
We cannot assume the "once Meta recovers" part any more than we could assume Yahoo.com would regain search engine supremacy, or MySpace would make changes to help it better compete with FB, or Blackberry's next model would beat the iPhone. Quite frequently, tech companies fail to ever "recover" once consumers move on from their products, and such transitions often happen around the time of macroeconomic turmoil.

But that's the company-specific risk to earnings. The question of whether people will be paying 50x earnings for electronics and software companies 1-7 years from now depends a lot on interest rates, I think.

...
22 years later Cisco still hasn't broken the price ceiling it set in 2000 despite total net income that is 5x as high today as it was at the turn of the century (10.6B in 2021, ~$2B in 1999).
1999 was the initial internet tech bubble. Lots of stocks were over-valued based on wild speculation as to their future potential, including Cisco.  A return to those highs requires not just income, but wild speculation about future income.
I was there, and you are right that people were paying very high prices for a stream of future earnings from tech companies because the growth of those earnings was being extrapolated forever from the recent past. In the past decade or so, people were paying very high prices for a stream of future earnings from tech companies because "there is no alternative" with bond yields so low. Anybody (ahem, like myself) buying or holding stocks at an average S&P500 PE of nearly 36 was clearly predicting bond yields would stay low for many more years.
https://www.multpl.com/s-p-500-pe-ratio/table/by-year

Had people in 2021 known that one-year treasuries would be yielding 4.7% by November, 2022 (up from 0.1% in January 2021), they would not have paid nearly as much for the future earnings streams of tech companies. But in the end it was the same mistake as the tech bubble. The rationale was different, but the discounted cash flow valuations that justified those prices depended on a faulty assumption penciled in as a high-certainty forecast whether it was the future earnings growth rate or future bond yields.

GilesMM

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Re: Battered Tech(ish) stocks
« Reply #18 on: November 10, 2022, 09:53:39 AM »
Holy cow, Carvana is on a tear today. Already up 30%.

Meta and Amazon are surging this week as well.
« Last Edit: November 10, 2022, 10:52:30 AM by GilesMM »